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Examining the Central Bank's Asymmetric Preferences
with Respect to Asset Price Volatility
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Majid Habibian Naghibi    , Mohammad Javad Sedighi Pashaki * , Masoud Salehi Razveh |
| Edalet University , mj.sedighi1366@gmail.com |
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Abstract: (12 Views) |
| This study investigates the asymmetric preferences of the Central Bank of Iran in responding to asset price fluctuations and the extent to which these fluctuations influence monetary policy decisions. Given the significant volatility of the stock market index in 2020 and subsequent years, the primary objective is to examine whether the Central Bank incorporates asset price changes into its monetary policy decisions and, if so, how its behavior differs under inflationary and recessionary conditions. To this end, an extended New Keynesian structural model is employed, in which the asset price index is incorporated as a key variable. To estimate the Central Bank’s reaction function, threshold values for inflation and the output gap are first obtained using the method proposed by Caner and Hansen (2004). The Bank’s behavior in response to asset price fluctuations is then evaluated using the Generalized Method of Moments (GMM). The estimation results reveal that, during inflationary periods, the Central Bank’s primary focus is on controlling inflation, with a reduced response to the output gap. In recessionary periods, the Bank’s response to the output gap increases, although it remains limited, reflecting the constraints on monetary policy in such conditions. Moreover, the Central Bank does not intervene in the asset price index during boom periods but provides limited support to the stock market during recessions. Given the strong link between Iran’s capital market and the money market- through mechanisms such as stock purchase loans and bank-managed investment funds-it is recommended that the Central Bank consider asset price fluctuations when formulating monetary policy. |
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| Keywords: Monetary policy, Stock price index, Financial crisis, Output gap, Inflation |
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Full-Text [PDF 936 kb]
(6 Downloads)
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Type of Study: Research |
Subject:
Special
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